Lawsuit based on a surreptitiously recorded phone call claims Google doesn't refund advertisers who spend money on fraudulent clicks (GOOG)

Google is being sued by an ad management company, AdTrader, that claims it does not refund advertisers whose money is spent on invalid or fraudulent clicks.

The lawsuit is based in part on a surreptitiously taped phone call, in which a Google employee explains why AdTrader is being kicked off its DoubleClick Ad Exchange system.

In the call, the exec says Google will refund AdTrader's advertisers for money spent on clicks that were in violation of Google's rules, the suit alleges.

AdTrader claims its clients received nothing.

Google denies the claims.

A web advertising company named AdTrader, whose staff surreptitiously recorded a phone conversation with a Google executive, claims in a class-action lawsuit that Google does not refund money to advertisers when it discovers that those advertisers have spent money on fraudulent or invalid clicks.

If the suit is successful it could put Alphabet, Google's parent company, under pressure to repay tens or hundreds of millions of dollars to advertisers whose money was spent on websites that Google later deemed broke its rules. The suit, citing a 2014 report, claims AdX generates $1 million per hour for its publishers.

A Google spokesperson said, "We look forward to reviewing the specific complaint. From what we have read in the press, these allegations are without merit. We have a longstanding policy of refunding advertisers for invalid traffic. As we recently announced, this is currently being expanded to include ads purchased via DoubleClick Bid Manager." That announcement was made in September.

Google is likely to fight the case. The company has an incentive to remove bad actors from its systems in order to make its sure its ad inventory is of high quality, to keep advertisers coming back for more.

The search giant has suffered for years from unfounded rumours that it retains money spent through its ad placement systems on websites that break its rules. The company often has difficulty explaining publicly why it kicks publishers off its platforms because to do so would offer clues to nefarious operators on how to avoid Google’s scam detection efforts. Google is also plagued by low-quality websites and advertisers who try to game its systems to their own advantage, and the company is known to be aggressive about removing them.

Nearly $500,000 - gone

About $80 billion of Google's $90 billion in annual revenue comes from advertising sales. Put very simply, Google provides a massive set of platforms through which advertisers pay to place their ads on thousands of available websites. Advertisers simply pick what type of people they want to target — by gender or location, for instance — and Google automatically places those ads on websites that fit the bill. Similarly, Google allows website publishers to offer their empty ad space for sale on those systems. That business is so lucrative, and so complicated, that ad management companies have sprung up to assist advertisers and publishers to get the best deals.

New Jersey-based AdTrader is one of those companies. Its staff came to believe there was a financial discrepancy in their payments from Google, the US federal lawsuit claims, when they taped a phone call with Google's Dublin-based director of online partnerships, Anthony Nakache. In the call, Nakache allegedly says that $476,622 paid by advertisers that ran on sites that fell afoul of Google's rules would be refunded to AdTraders’ advertising clients, according to the suit. What Nakache did not know, AdTrader claims, is that AdTrader was acting as both a buyer and a seller of ad space for its clients and was thus able to check whether that $476,622 actually arrived in its clients' accounts.

The money was never received from Google by the clients, the suit claims, and AdTrader ended up reimbursing its clients for the sum. ""Advertisers have long been promised that they would get refunds or credits if Google determined that impressions or clicks on their ads were invalid. It appears that Google never honored this promise, and this lawsuit is intended to force Google to pay back its advertisers what they are owed," said Randolph Gaw of the law firm Gaw Poe in San Francisco, the attorneys representing AdTrader in the case.

The secretly recorded call

On May 19, 2017, Google informed AdTrader in an email that its DoubleClick Ad Exchange (AdX) account was suspended, and $476,622 in ad sales accrued in it would be withheld. The company was also kicked off the AdX platform. Google’s email was not specific as to why AdTrader was banned, but it mentioned that placing ads on sites with “misguided navigation” issues, such as “Linking to content that does not exist,” as an example of the violations AdTrader could have committed.

Over the next five days, AdTrader scrambled to find out why Google was withholding its cash. On May 24, 2017, someone on AdTrader’s staff began recording a phone call with Google’s Nakache. The Google employee was in Ireland and the AdTrader employee was out of the US at the time, so US privacy law did not apply to the call, the lawsuit states. According to a transcript prepared for the lawsuit, the conversation went like this:

AdTrader: All of the money is going to be refunded to advertisers?

Nakache: Yes.

AdTrader: Does that mean that every single impression and every single click for all of our publishers has been…

Nakache: Exactly. Everything in the account, the account is in violation of our policy, advertisers have been impacted, and as a result we have made the decision to refund all the advertisers and all the revshare from Google. ***

AdTrader: So, every single advertisers who has bought a single impression for the past two months from any of our publishers will get their money back? Is that correct?

Nakache: Yes. ***

AdTrader: I see. OK, so we are not going to receive anything unless the appeal is successful we will not be paid anything.

Nakache: No, the money is going to be paid back to the advertisers.

AdTrader: So, whether the appeal is successful or not, we will still not receive the payment, is that correct?

Nakache: Yes.

Puzzled, AdTrader asked its other clients if they had ever received a refund from Google. None of them had received any money, the suit alleges.

The plaintiffs do not say how much money they believe Google withholds from publishers each year. Google doesn't break out how much revenue runs through its various online ad products, which include DoubleClick Ad Exchange, DoubleClick Bid Manager, AdWords, AdSense, and others. So it is difficult to estimate how much money is at stake if Google loses or settles the case.

What's at stake

Google has hundreds of different apps and platforms that generate its sales, but it breaks down those revenues into only five large segments. Some products, such as AdX and Bid Manager, can be used to buy Google ads in more than one segment.

Google earned $15.5 billion last year from its "Google Network Members" segment, which includes web publishers, according to its annual report.

It is not clear what percentage is spent through AdX, or what percentage is taken by Google in disputed circumstances. Brian Wieser, a senior research analyst at the Pivotal Research Group who has covered Google for years, believes $14 billion might run through the system that AdTrader was using. But he calls that a “crude guess” because “it’s difficult to know with much precision.”

Separately, Google said in August that it would refund 7-10% of total purchases back to advertisers after it had discovered invalid clicks on ads bought in Q2 2017 through DoubleClick Bid Manager.

Another suit has been granted class-action status

The AdTrader allegations bear a resemblance to a similar set of allegations that surfaced in 2014, when Google was accused by at least seven web publishers of wrongly taking millions in ad fees their sites had earned using Google's AdSense program. The sites all claim they were following Google's strict advertising rules, and some say they were encouraged by Google's sales employees to continue what they were doing. But then their AdSense accounts were suddenly cancelled, and all the money in their accounts removed. Google denied their appeals and gave little detail on what prompted the cancellations.

Three companies sued. One of them, Free Range Content Inc., persuaded a federal judge in Northern California to grant its lawsuit class-action status in July of this year. That suit now covers all AdSense publishers in America from 2013 onwards who may be owed money, according to the ruling. The class likely includes thousands of customers. The case is ongoing. Google denies the allegations.

Why would Google kick publishers and ad managers off its system, when it needs those companies to generate the ad inventory Google's own revenues are dependent on? AdTrader claims in the suit that it has discovered an answer.

Balint Torok, a strategic partner manager based at Google in Dublin, told AdTrader that some companies appear on Google’s radar when they reach a certain revenue run-rate, for instance $4-5 million, the suit claims. AdTrader’s own employees believed that at that level, its clients might be creating enough revenue that Google would want to cut out the middleman and work directly with them, the suit alleges.

A few days after Google terminated AdTrader on May 19, it contacted one of AdTrader’s most important clients, a video game highlights company called DingIt, to begin a direct relationship, the suit claims.